Yield-starved investors can use the Nationwide Risk-Managed Income ETF (NUSI) as an alternative to a growing list of once-beloved income-generating asset classes. Add municipal bonds to that list.
NUSI is an actively managed portfolio of stocks included in the Nasdaq-100 Index and an options collar. Per index rules, the fund only invests in the top 100 largest by market cap, nonfinancial stocks listed on NASDAQ. A collar strategy involves selling or writing call options and buying put options, thus generating income to hedge some downside risk. The strategy seeks to generate high current income monthly from any dividends received from the underlying stock and the option premiums retained.
These days, municipal bonds are offering piddly yields, straining the allure of a once-beloved safe-haven. Meanwhile, NUSI, which offers downside protection, sports a distribution yield of 7.81%.
“The yields on state and local government bonds have steadily dwindled over the past month, even as the resurgent coronavirus pandemic is threatening to prolong the deep recession that’s dealing a financial setback to borrowers in virtually every corner of the $3.9 trillion markets,” reports Amanda Albright for Bloomberg.
NUSI Continues Standing Out
The Nationwide Risk-Managed Income ETF will use an options trading strategy called a protective net-credit collar to generate income. The options strategy sells an upside call option and uses a portion of the proceeds received to buy a put option to hedge downside risk on an underlying portfolio of securities.
Specifically, the ETF will try to achieve high monthly income generation, portfolio volatility reduction, reduced duration risk, and interest rate sensitivity, capital appreciation from equity participation, downside risk mitigation and enhanced tax efficiency of index options.
“The disappearing yields aren’t unique to the municipal market. With the Federal Reserve injecting cash into the financial markets to stoke the economy, those on corporate bonds, mortgages and U.S. Treasuries have tumbled, too,” according to Bloomberg.
While misery may love company on the low yield front, it won’t be joined by NUSI and with NUSI available, investors don’t need to stick with low-income instruments.
NUSI incorporates both covered call and protective puts as a way to enhance income generation and protect against any potential downside.
A covered call refers to an options strategy where an investor writes or sells a call option on an asset which they already own or buy on a share-for-share basis to generate income via premiums derived from the sale of the call options. However, the covered call strategy caps upside potential and provides limited downside protection, so it is ideal for investors with a neutral-to-bullish outlook.